What's Behind CVS Health's Fourth-Quarter Loss?

The acquisition of Aetna wasn't enough to offset continued problems for the pharmacy services giant's struggling long-term care business.

Keith Speights
Keith Speights
Feb 20, 2019 at 3:00PM
Health Care

When CVS Health (NYSE:CVS) reported its third-quarter earnings in early November, the big story really wasn't about the results. Instead, investors were primarily focused on the pharmacy giant's impending acquisition of Aetna. The acquisition was finalized only a few weeks later.

CVS Health announced its fourth-quarter results before the market opened on Wednesday. The integration of Aetna into the company's financial performance for the quarter was certainly important. But CVS Health's Omnicare long-term care (LTC) pharmacy business also shared the spotlight this time -- and not for a good reason. Here are the highlights from CVS Health's fourth-quarter report. 

CVS pharmacist at counter across from a customer

Image source: CVS Health.

CVS Health results: The raw numbers

Metric Q4 2018 Q4 2017 Year-Over-Year Change
Sales $54.4 billion $48.4 billion 12.4%
Net income from continuing operations ($421 million) $3.3 billion N/A
Adjusted earnings per share $2.14 $1.92 11.5%

Data source: CVS Health. N/A = not applicable.

What happened with CVS Health this quarter?

CVS Health reported a solid revenue gain from the prior-year period. Most of the growth came from the inclusion of Aetna's revenue, which totaled $5.5 billion during the period from Nov. 28, 2018, through Dec. 31, 2018.

The company's retail pharmacy business also performed well, with a 5.4% year-over-year revenue increase driven by higher prescription volumes and higher branded drug prices. Prescription volumes increased in large part due to continued adoption of the company's patient care programs, collaborations with pharmacy benefits managers (PBMs), and CVS Health's preferred status in several Medicare Part D networks.

CVS Health's own PBM business experienced modest growth in the fourth quarter. Revenue edged up 2.2% over the prior-year period, with higher pharmacy claims volume partially offset by continued pricing pressure from customers.

But with all of the relatively good news, CVS Health still posted a net loss of $421 million in the fourth quarter. Why? The company recorded a goodwill impairment charge of $2.2 billion in the fourth quarter (and $6.1 billion for the full year) related to its struggling LTC pharmacy unit.

CVS Health noted that its Omnicare LTC business continues to face multiple challenges. These issues include lower occupancy rates in skilled nursing facilities (SNF), reimbursement pressures on LTC facilities, and a significant deterioration in the financial health of SNF customers.

The company's non-GAAP earnings, however, weren't weighed down by the big LTC goodwill write-off. As a result, CVS Health still reported solid year-over-year adjusted EPS growth.


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What management had to say

CEO Larry Merlo said: "2018 was a milestone year for CVS Health as we successfully completed our transformational merger with Aetna, began effective implementation of our integration strategy, and took important steps toward building the integrated healthcare model that will bring substantial value to our various stakeholders. We had strong financial performance and delivered on our operating expectations."

Merlo added:

With the completion of the Aetna acquisition, we have set the stage for CVS Health to excel in a market that is rapidly transforming. We strongly believe in the long-term value that the full breadth of our capabilities can provide. Our unique combination will drive above-market growth going forward across all of the enterprise. Maintaining our focus on community-level products and services will drive meaningful value for both consumers and payors, while improving our bottom line and the value we return to shareholders. Ultimately, our open platform model allows us to meet the needs of all payors with newly created products and services. We're more excited than ever about the opportunities that lie ahead.

Check out he latest CVS earnings call transcript.

Looking forward

CVS Health expects that its full-year 2019 GAAP diluted EPS from continuing operations will be between $4.88 and $5.08. The company projects adjusted EPS between $6.68 and $6.88. Even the upper end of this range is lower than the adjusted EPS that CVS reported for full-year 2018.

Merlo acknowledges that "2019 will be a year of transition" for CVS Health. The company will be busy integrating Aetna into its business. It has work to do in turning around its Omnicare LTC business. And CVS Health continues to face strong rivals in retail pharmacy.

But in Merlo's presentation at the J.P. Morgan Healthcare Conference in January, he said that acquiring Aetna will allow CVS Health to create "a new front door to healthcare." Merlo stated that over time, the acquisition would pay off in a big way for shareholders. Achieving that vision, however, will take longer than one quarter -- or even one year.